美國鋼鐵 (X) 2016 Q3 法說會逐字稿

Welcome to the United States Steel Corporation's 2016 third-quarter earnings call and webcast.

(Operator Instructions)

As a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Dan Lesnak. Please go ahead, sir.

Thanks, Kevin. Good morning, everyone, and thank you for joining us this morning. On the call with me today will be US Steel President and CEO, Mario Longhi; and Executive Vice President and CFO Dave Burritt. We posted our slide presentation prepared remarks under the investor section of our website when we released our earnings after the market closed yesterday, and we will not be covering those on the call. We will begin with some brief introductory comments from Mario and then proceed directly to the question-and-answer session.

Before we begin, I would caution you that today's conference call contains forward-looking statements and that future results may differ materially from statements or projections made on today's call. For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the end of our release and the slides that posted on our website and are included in our most recent annual report on Form 10-K and updated in our quarterly reports on Form 10-Q in accordance with the Safe Harbor provisions. Now to start the call, I will turn it over to Mario Longhi.

Good morning, everyone. Thank you for joining us today. We continue to make significant progress on improving our business model, lowering our breakeven point, improving our already industry-leading safety performance, and strengthening our balance sheet. We have faced and continue to face many challenges, some at the Company level and some at the industry level. At the Company level, we have streamlined our operating configuration, including the temporary idling of facilities to create greater production efficiencies under today's market conditions and have made many hard decisions to permanently address unprofitable businesses and facilities with a final resolution of our former operations in Canada now within our sights.

We have assessed the capital markets to derisk our balance sheet and strengthen our cash and liquidity position, which better allows us to pursue many value creating opportunities. We have improved our product mix with value added products currently representing over 70% of our flat-rolled segment shipments and approximately 50% of our European segment shipments. For our tubular segments, we now have an expanded suite of premium products and are well-positioned to benefit when the energy markets recover. We are accelerating our investments in our facilities to achieve sustainably better and more consistent operating performance including improved reliability, quality, delivery, and customer service. Innovation in both products and processes is the foundation for our future success.

We have continued to invest in our already well-established and extensive research and development facilities and organizations in Pittsburgh, Detroit, Houston, and Slovakia. With access to our state-of-the-art equipment, computer models, and simulators, our experienced team is focused on the future. We are pleased with the progress we have made so far on the trade front, but much more work needs to be done to truly create a sustainably fair and level playing field. The rulings issued earlier this year in the three flat-rolled cases that we filed in 2015 are a step in the right direction in the application and enforcement of our trade laws.

We are continuing to utilize all the tools available to us as demonstrated by our Section 337 filing against Chinese steel producers and distributors and the circumvention actions filed against Chinese companies who are routing products through Vietnam in order to avoid tariffs. We continue to focus on the things that we can control and have delivered meaningful progress so far. We are moving toward a business model that can generate economic profit across the cycle and create true value for our stockholders, employees, and our stakeholders.

Thank you, Mario. We've provided more detail on many of the topics Mario just mentioned in the presentation and Q&A documents we posted to our website, and we would encourage you to read those when you have some time. Kevin, will you now queue the line for questions?

(Operator Instructions)

Tony Rizzuto, Cowen and Company.

Thank you very much. Good morning, gentlemen. Mario, could you provide more color on the nature of the unplanned outages and the operational headwinds that you face? And specifically for one question, just part of it, do the facilities and equipment that was affected directly in the quarter?

There was not any single major event that impacted the output, Tony. It was a convergence of several things that happened in sequence. And you know in an operation like ours with the improved streamlined footprint that we have, when you have a half a day of an issue here, another half a day of an issue there, it begins to compound, and it makes it more difficult with the absence of slack in the system to be able to recover more quickly. That is the nature of what happened.

Can you quantify -- you broke out the volume impact but I was wondering if you could quantify the dollar hit that you experienced to the P&L, the loss of volume, the reduced fixed cost absorption, and other factors. Just to help us get a feel for that.

I think you can do your own math on that, Tony, given the fact that the impact to output was basically about a 5%. You can take that volume and put it into your models and I think you can get to the impact of that yourself.

One thing you can think about it is, those will be all incremental tons so your fixed cost is already absorbed so you'd be talking about just really the margin over your variables, so it's a pretty significant margin to think about. Repair and maintenance ran a little bit higher because we did have to get in to do some things quickly, and then as Mario said, you just get those production and efficiencies that are part of the cost absorption that goes with it.

Okay, and when you talk about the need for revitalization, obviously this has been a transformation process, a journey as you have referred to Carnegie Way. Are you finding that as you are going through this process, are you finding now that maybe you've under spent on the capital side? Is this something that's coming out? Just by looking at the language you used in the release, it seemed that way to us. And I just want to make sure, if that's the case, what kind of magnitude of capital spending might we see that gravitate towards from the roughly $350 million that you've targeted? Could you just delve into that a little bit for us?

Sure. First and foremost, thanks for describing the nature of what we are doing here as a journey because it truly is, and I would offer that no, we have not been under spending. What we have been doing is -- we've only been able to accomplish what we have accomplished and gotten to the position that we are because we have been investing appropriately and making sure that everything we know is being addressed and moving to minimize the conditions that we experienced in the past quarter, which is unplanned events. So we've been able to get to this point because we've been doing all of the right things. The reality, though, is as we go into a different mix and we begin to operate under much more tight conditions, every single thing that impacts, we don't have the capacity to more quickly -- to recover.

What we do know, though, is that as we begin to operate in this different footprint, we're learning more things. So, therefore, what we are referring to is that we're going now that we do have a very more comfortable position with the balance sheet, we can accelerate and investing more quickly into the new learning needs that we have as we go forward. So we will be increasing because, for example, what we learned in the past quarter, they're going to be added to the already planned set of events that we had already forecast for the next two quarters and, therefore, that is going to require a little bit more money than we were foreseen doing. But it's part of a journey of learning, Tony. That's what it's all about.

Thank you. Evan Kurtz, Morgan Stanley.

Hello. Good morning, guys.

Good morning, Evan.

Similar question just about next year's capital spend. I know you talked before in the past about maybe doing some EAF work at some of the other facilities outside of Fairfield, and I'm wondering how some of these furnaces and some of the equipment that you have is a little bit older at some of the other plants. Is something that you are evaluating now some sort of an EAF solution that maybe would replace some of the older technology that you might have in place? Is that something we could see for next year?

That has -- the analysis has been updated on a regular basis. And I would go back to when we started this, which led us to make the decision the first EAFs. It is just unfortunately that we faced this terrible energy market, and we were forced into a position of stalling it for a little bit. But the concept has not changed. We continue to evaluate where is the best investment can be made, and we will certainly continue to pursue the opportunity to apply more flexibility which the EAFs will certainly give us. So we don't have at this point a final decision yet, but I guarantee you that the analysis is continuing, and we will bring it up to your attention as soon as we are comfortable with it.

Okay. And then just maybe one follow-up on the tubular business. It sounds like from the press release that you are not really expecting any sort of major turnaround there in the market in the near future. Is there anything additional that you can do on top of what you have already done in the first quarter as far as minimizing the losses in that business while the market recovers?

Yes, there is actually -- the folks continue to prepare for what we think -- we are planning for a very, very simple year in equivalent to what we saw, maybe a little better than this year. And the analysis that we do incorporates another set of actions that we can take that will improve the cost position even more. A lot also of what is being done has to do with preparing yourselves to come out of this a lot better in a manner where our breakeven cost is going to be meaningfully lower, and when you couple that with the fact that we today have a complete and full suite of products which includes premium connections that can be utilized now in any environment, no matter how challenging it is out there, it should really give us a very different ability to operate in the market that we've never had before.

We just opened our first office in the Middle East, which expands our reaching in terms of markets we never touched before. So I think when you look at the horizon and whenever these markets return, we will certainly be much, much better positioned to operate in a manner that we have never been before.

Chris Olin, Rosenblatt Securities.

Hi. Thank you for taking my call. Mario, could you just give us some thoughts on how you see the domestic market moving over the next couple of months? There has been some talk about prices that have bottomed, inventories pretty low. You are feeling like the market could be turning here?

I would have a lot of empathy with that statement you just made. We see it pretty much in the same form. The inventories continue to contract. They are in a position better than throughout the whole year. Certainly, we believe that prices have bottomed. As a matter fact, if you look around the world, the whole thing is just turning. It is not just an isolated event this time around focused -- centralized only in North America.

It really is the whole world has repositioned its fundamentals, and I think that will be very positive for what we could see coming into the next couple of quarters. Even raw materials are also following the same kind of pattern, and particularly, not only in North America but Europe is probably seeing the best momentum we have seen in quite a while. Raw materials are going up in Europe but there is probably a better alignment throughout the whole value chain of value creation in that regard. So I see a pretty strong momentum over there the same way that we were expecting for here.

Interesting. And then just as a quick follow-up, can you give us any preliminary thoughts on how your contracts could be resetting for 2017? I'll leave it at that.

As you know, we are in the middle of all sorts of negotiations. Negotiations are going well, and I would just offer that if you reflect on where we were, the fundamentals that we are dealing with at the end of last year when we were negotiating, we are certainly in a much better environment, a much more realistic and equitable environment today than we were last year. So we should be in a better place coming out of this.

Phil Gibbs, KeyBanc Capital Markets.

Good morning, Mario. Thanks for all the color, appreciate it.

Good morning, Phil.

Had a question on the maintenance CapEx and maintenance spending with the US flat-rolled. I know it was asked a couple of different ways, but can you just help clue us in on 2016 where you are at right now with those levels, and what 2017 or maybe a more normalized level looks like for you? I think everybody is trying to figure this out.

Yes. Dan has been working with the folks to get -- we are in the planning phase right now, but if you look at some of the levels of operations that we've had this year compared to history, we certainly have a much more streamlined footprint with changes of nature in which how much money you've spent. But as we learn more about the opportunities that we have to continue to improve faster, we are going to be allocating. Now we do have a much better comfortable position to go address it in a better and faster manner, which will certainly increase or pro rata to what we have been doing before. And Dan is going to be in a position to provide a little more clarity on that as we go forward.

I would just say that we did say we are going to spend more in 4Q to accelerate the improvements in the facilities. That will bring us year over year pretty consistent with last year, and to Mario's point, we have a lot less facilities than we did last year. So I think if you think about maintenance actually on a per ton of capacity that is running, we are actually spending more on our facilities this year than we did last year so I think we are doing a pretty good job of addressing some challenges. We are not cutting back; we are getting things done a little bit faster now.

Dan, are you talking about maintenance CapEx or maintenance operational expense?

Maintenance operational expense.

Okay.

The CapEx, that takes a little bit longer to get the projects completed, planned, and approved. So we will certainly be including that, as I said, in our next year's guidance. You should expect that we will be able to give you some better color on the maintenance and CapEx spending that is related to the improvements in the facilities.

Okay. I also wanted to ask a question on US Steel Canada. It looks like you will have some opportunities to sell them pellets next year assuming this deal closes pretty soon. Question is on third-party pellet sales this year and what room you may be able to have to enhance that opportunity over and above the sales to Bedrock.

The opportunity is still there, Phil. We are very flexible in that regard. It's not something that has been an overhanging issue for us. As a matter fact, we have had some pretty good investments made in the past quarter up there in a couple of our facilities, and we should step up the level of performance, which gives us pretty good comfort that whatever deals that are available if we take them that they'd be of value creating nature for us. So we are flexible in that.

Any clarity on what you are selling this year in terms of third-party pellet sales?

We had some spot sales to one of our competitors during the year when they had -- they split with their former supplier, and then we've done some spot outside the country but at global prices, that is not a big opportunity for us. There is not a big spot market in the US. Our ability to get some contract business with Bedrock is certainly a good thing for us. As Mario said, we do have good capacity out there to do that and then probably do a little bit more if we had the opportunity.

All right, thanks so much.

Timna Tanners, Bank of America Merrill Lynch.

Hello. Good morning, guys.

Good morning, Timna.

I read in one of your documents that you weren't going to be giving a lot of color on met coal negotiations, but I completely respect that. It does seem that some of them are ongoing. But would it be possible for you to give us a little bit of color on how you're managing the situation in Europe? And also maybe give us a proportion of business that is still being negotiated versus those that are in longer-term contracts?

Timna, Europe, it is a quarterly arrangement, so they will see some impacts sooner than we certainly would here but they are not really in the seaborne market. It is a supply that is coming from mostly Poland and Czech Republic. I keep thinking Europe what we have seen is they typically over there, there is a better opportunity to pass through that cost to the customers. The cost push cost pull pricing seems to work better there than it does here. I think we will have some exposure but I think we also maybe have some better potential to offset some increased cost with some increased prices.

Here for now, we do have some of our tons priced. We probably don't want to go beyond that because we are negotiating, and we don't want it to impact our negotiations and we don't want to give you any misleading or partial information. We will give you an update once we are settled on the January call, as we usually do.

Okay. I appreciate that. You mentioned in your comments when you are discussing some of the balance sheet fixes that you are evaluating all options to improve your position, but I just wanted to clarify whether that meant that you would consider issuing anymore equity or what you were referring to there.

I think when we were referencing the value enhancing opportunities that was more now we are in a better position to invest in our Company and our facilities.

Okay. So along those same lines, you made comments about further growth investments. Are there any things that you could point to? I know you maybe there's a good chance to talk about some of the value add investments you are making in high-strength steels or are you referring to something else?

It's really the high-strength steels on the automotive side. There has been pretty good clarification on the areas that we are going to invest on packaging. And those two areas alone will provide for an opportunity that we can extrapolate to some of the other businesses that we do, but the two core ones right now really are centering on automotive and packaging.

Okay, got it. Thank you.

Matthew Korn, Barclays.

Hi. Good morning, everybody.

Good morning, Matthew.

I want to thank you all for all the information, all the packages you put together. It's very, very useful. I do would like to ask, you talked a little bit in your materials on the 337 case, and I want to dig a little deeper there, if I could. We have seen how those entities that don't participate in the previous trade case discovery phases are most often hit with the heaviest suggested rates. Is there any parallel here? Meaning like when you point out these 20 Chinese producers and distributors, can we expect that these will be likely blocked? I'm just trying to discern how to think about the potential outcomes in the case where you are really not talking about degrees of penalties; it's much more of a binary result.

I think you referred to it correctly. The trade cases -- the outcomes of the trade cases normally are a penalty, a premium that is imposed upon the company's countries and products. The difference here is that the penalty is a different one, which is blocking those folks from being able to participate in this market for quite a long period of time. And it's basically for all products. So that is a fundamental difference between the two approaches.

Okay. Let me follow-up then on this. You had a previous question on the high-strength steel. You talked some about some of the movements you have moved there. Where are we in terms of how close we are to commercial introduction of the generation three? What is the timeframe of executing on this new finishing line design? And how soon do you think you would be able to come to market with products in size and when you think about the volume and margin opportunity there, how would you scope that out over the first couple years?

We are ready, Matthew. That is something that is already being offered to the market as we speak. We're out there already. Many of our customers have samples that they are processing, and we are ready.

Got it. Thanks, folks.

Thank you.

Gordon Johnson, Axiom Capital Management.

Good morning, guys. Mario, I was just thinking about the trade case focused on Vietnam. I guess there is a precedent where I think part of the trade case is deciphering whether there is a significant change in going from hot-rolled to cold-rolled or galvanized. I think that there was a precedent in the 201 [safeguard] petition in 2002 as well as the voluntary restrain agreements of the 1980s that showed that galvanized is classified as a substantially transformed product. Can you comment on that dynamic of this most recent potential trade case? And then I have a follow-up.

Gordon, this is Dan. Actually, this is a pretty complex [oh]. In our Q&A document we posted, we actually provided a link to the DOC site where you can see our filing. I think if you read the filing, it is a pretty long discussion about the reasons for it. I think that's probably the best thing is. It's too hard to cover on the fly, but we gave you access to the documents there. It describes our rationale and what we are pointing to as why this case makes sense.

There is a summary there, Gordon, that you can use. It's only about 75 pages. You can get through it.

Okay. And then just as a follow-up, if I look at what the Q4 implied adjusted EBITDA guidance is and I annualize that, it's about $704 million. And if I apply that to 2017, and maybe you guys aren't ready to give comments on 2017, but maybe just anecdotally, is that the right way to think about 2017 and if so, does that assume that the coking coal prices are negotiated down? Thanks for the question.

I guess, Gordon, I think 4Q probably isn't a representative quarter because we are still going to have some issues to cover with additional maintenance on the facility, some planned outages and downtime, so I would say that from a volume perspective, 2Q is a more representative number for what we should be shipping on a regular basis. So 4Q shipments will probably be lower than you'd expect and maintenance will be higher than you would expect ongoing. But I don't know that 4Q would be a good quarter to annualize. We will have some uplift price on price upside from contracts. We will probably have some price downside from coal. We will have to see how that balances out.

Okay, and one last one actually. With respect to the auto negotiations, the SAAR data came out yesterday, down year over year again. Could you update us and how those negotiations are going if possible?

They are going well at SAAR, as far as I'm concerned. Very good discussions. We believe that the markets are still going to be very healthy next year. People talk about nuances here and there, and we've reached peak, whatever. It's a pretty good market out there, and I don't see this declining in a way that can be impactful. So we are looking forward to it.

Arjun Chandar, JPMorgan.

Hi. Good morning. Thank you. You've taken several steps towards derisking your balance sheet this year, but in light of current steel price volatility and the operational challenges you've mentioned on the call, what are your thoughts about using existing liquidity and cash flow to repay even more debt versus investing in your Company and facilities?

I'd say we have been pretty optimistic. We did buy some debt back this past quarter at a slight discount. I think we really wanted to increase our cash liquidity because we want to move forward faster on investing in the Company. That would be our priority. I think when you look at our balance sheet, our net debt, we are in a pretty strong position now but I think we are more focused on where we can invest to improve our performance, consistency, create value, drive higher earnings.

Great, thank you.

Seth Rosenfeld, Jefferies.

Good morning. Thanks for taking my question. A couple of questions on your European business, please, which seemed to perform quite well in the past quarter. On the volume front, you seem to see much lower than normal seasonality in the third quarter. Can you talk a little about where you see European demand across the region, and perhaps looking forward, how you would respond to that given the already very high utilization rate at your European facility? And also in your release, you comment about the high level of import pressure, especially for tin plate. Can you give us a little bit of a sense of to what extent you have seen success in recent trade cases in Europe for cold-rolled coil and potentially the case for a new trade case on coated products as well? Thank you.

Seth, the environment over there certainly has continued to strengthen in general. We have been operating in a very efficient manner. Carnegie Way improvements continue to occur, and combined with the fact that we have been moving more towards more sophisticated products, that should bode well as we culminate this year and get into next year. As a matter fact, we are right in the middle of commissioning a new pickle line which will help significantly the shift towards more interesting products. So on the trade cases, they were sort of -- Europe was sort of late.

The efforts that we were putting in, in this concept of addressing fair trade hearings here in the United States, we weren't doing the very same thing over there at the same time. And it seems like it took progress here in the US to begin to be more visible, and it certainly helped them, the Europeans, see that the damage over there was equivalent to what was happening here. Finally, it began to take hold coming into the second quarter, and I think that there is a much more robust intensity in the way in which people are looking at that.

So some of the trade cases were -- they actually moved a lot quicker in Europe than they did here. And the potential for more is certainly higher now than it has been in the recent past. So the focus is there. The affair is working very effectively now within EU. So if things continue to go in this direction, we should see an even better environment going forward.

Great, thank you. And if I could ask one quick follow-up question. You mentioned the Carnegie Way savings benefiting your European operations. And more generally speaking in terms of the Carnegie Way program. It seems as though the last quarter, the last several quarters have seen a bit of a deceleration in the incremental Carnegie Way savings being identified. Can you just speak a little bit about the outlook for these savings measures? Is there a lot more to come into 2017 or given the strong track record you've already had, should we expect the incremental impact to begin to tail off? Thank you.

We've had a quarter where some of the efforts had to be diverted a little bit to make sure that we addressed the unforeseen challenges that came our way. But in spite of that, we still -- I think we ended the quarter with more than 300 new initiatives being completed. And I think going into the next quarter, there are probably another 500 slated to be pursued. So in the pipeline, it is even much greater than that. So I wouldn't focus so much on the actual dollars that you saw coming out of this quarter. I think there is more to come. Eventually, these things will begin to taper off as we get closer to the point of -- that we can achieve an incredibly higher level of competitive base from a cost perspective. And that is the ultimate goal of what we are relentlessly pursuing.

On the other hand, the Carnegie Way also in contrast has very significant levels of improvement on the overall value chain. You look at the amount of cash that we have been able to generate both from operations as well as the value chain and the logistics side of things. We are talking here about some different types of innovations, and we just mentioned a couple of them here in packaging and automotive. So this whole context is what the Carnegie Way encompasses. It is not just the cost, and I think we are going to continue to show interesting results in both fronts.

Jorge Bernstein, Deutsche Bank.

Hello. Good morning, Mario and Dan.

Good morning, Jorge.

One of the last questions that could possibly be left is if you could just comment on the US Steel Canada restructuring. It looks like you will be getting $126 million against the $2.2 billion claim you had against a subsidiary. Is that within the realm of expectation of what you are looking for and could you just comment will there be any accounting offsets against what you may have already pre-reserved for that?

Actually, that is the recovery of our secured claims interest that is accrued on that. Actually, on our books, we are actually reserved to them both slightly below that. We're reserved down to about 60. So when we collect that money, we will have reversal of some of that reserve. But we think it's a good. We think the momentum on the transaction is moving well. Hopefully, we'll get towards a resolution sooner. It would be nice to have it by year end. We will see how that plays out, but I think right now the process is going well. I saw some favorable input from the finance ministry up there. They are encouraged by the process of our agreement with Bedrock except we are going to keep pushing forward. We want to collect our money, and we want to start selling these guys pellets.

I think Dan mentioned, as we all four agree, the momentum is really intense right now. It's really a big one.

Great, and looks like there's a little upside there relative to book. And then just a second question, Mario, for you. Big picture, obviously, we are seeing what could prove to be a very massive spike in met coal settlements for 2017. And you guys have been facing a lot of volatility on HRC, so I'm just wondering is there going to be any ultimate effect that you believe on the structure of steel contracts for the OEMs particularly in auto.

Could you see a model maybe moving over toward more like of a cost-plus type formula where they can absorb these spikes in met coal or maybe moving to a kind of quarterly reset system? If you could just maybe comment if we could see the US ultimately moving over to more of a flexible pricing system instead of these annual once a year negotiations.

That's a great question, and this is part of the equation that some of our folks are out there conversing with the customers. And these things are very fluid and very complex. At this point, we don't really have a lot of clarity to give you, Jorge. We will let you know once we get through this, we will let you know in more detail.

And we do have with our customers a mix. Some customers have some of their tons annual and some quarterly. So there are some quarterly that are in that area of our business already.

Matthew Fields, Bank of America.

Just want to ask a bigger picture question and sort of a more specific one. We started the year at zero EBITDA guidance. We went all the way up to 850 and now we're at 475. So obviously, you guys more than anybody are aware of the volatility in earnings potential of this -- your business model. Do you feel that you are at an appropriate level of debt given that volatility or do think it needs to come down?

We keep watching it. If you remember where we were last year, and you look at where we are right now, it's not a one reference point, the guidance in the way in which we look at things. I think we are very comfortable right now. If you look at our profile, it is much, much better. It gives us a lot more flexibility to entertain the different options that are given to us so that we can apply resources in a manner that minimizes our exposure, for lack of a better word, to the volatile environment, which I don't think it will change in the foreseeable future. Based on what we are doing, our expectation is that we are going to be in a position that we are less exposed to the volatility that we have seen.

Okay. And then just a little but more of an odd one. I saw the filing today that you are amending your bylaws to allow a stockholder with 3% interest over three years to nominate 20% of directors. Is that a result of a specific shareholder making noise? Or can you give us some clarity there?

Not at all. It's just something as we have aligned everything and how the world evolves around us, we saw that it's a trend, and we have really no concern. We have great interactions with them, and I think it's just a normal next step into the way in which we play around.

It's really just governance best practice that is out there right now.

Charles Bradford, Bradford Research.

Good morning.

Good morning, Chuck.

Given the something duties and countervailing duties again with Korea. Has POSCO stopped shipping the UPI?

Actually, yes, they have as a matter of fact. We just got recently some requests from them, and we are supplying some of the material from here to them.

Are there added costs to UPI if you supply all that material instead of them?

UPI operates independently, Chuck. They have the freedom to choose to have their supply from anywhere. And I think this is part of what we strive to have overall, which is the free market, fair market, based on the rule of law where everybody participates in a way where a proper competitive environment exists. It is the theme of -- that we keep banging on all the time. We need to have a level playing field and in that regard, UPI should have the freedom to operate anyway they want from a supply perspective.

Does POSCO have any claim or [interest] to eliminate the partnership now that they are no longer supplying hot band to UPI?

That is not something that we would comment on at all, Chuck. We have had a partnership for a long and we have a solid relationship with them and there is nothing there that we can comment on.

John Tumazos.

Thank you. How much would domestic industry-wide shipments have to rise for Granite City, Illinois to restart?

The industry is running in the low 70% of capacity utilization. So you can go back and see where is it that proper balance could be established, but certainly not at this level, and as far as we are concerned, we have plenty of flexibility on our melt side so it's not that we have to get back and bring it back on. We will bring it back on when we see that there is a better and much more stable market that requires that kind of capacity that can be brought back online without providing an enormous amount of disruption in a way that we need to -- we talk about volatility over time. We will try to make sure that what we do is in response to a stable market, better position to absorb capacity rather than create more disturbance without the capacity, without the consumption being readily available.

Alex Hacking, CIGI.

Hi, good morning. I just want to follow up quickly on the agreement to supply pellets to Canada. What is the approximate annual tonnage on that agreement? And how would the pricing be set? Is it fixed price, is it linked to IODEX then to steel prices? Thanks.

It is per their requirements, so it will be based on how much steel they make. Lake Erie running full I guess would be maybe close to 3 million tons if they actually ran full but nobody is running full at this point in the cycle. We are negotiating with these guys. It is going to be market-based. We are in a business to make money, so it is going to be a market-based agreement.

Thank you.

Tony Rizzuto, Cowen and Company.

Thanks a lot for taking my follow-up. I just wanted to speak a little bit about US Steel Europe and the price realizations that were lower than what we expected in the quarter. Given that a high percentage are spot related, should we expect a meaningful sequential improvement? Or is that more of a 2017 impact do you think? And I'm asking because the comments earlier in what we see happening in met coal, it looks like there is going to be a pretty big jump sequentially in your met coal costs, and I'm wondering if you think that the price realizations will be able to offset that jump in raw material costs.

I think you've seen price increases still flowing through over there. The announcements keep on coming. So I think also we have the potential for a better mix. So mix improvement from getting this pickle line commissioned and running. We'll probably see some benefit there, but I think still you are seeing price increases still being announced in Europe.

And when you mentioned before about that you source the met coal there from Poland and the Czech Republic, is there kind of a benchmark that we should think about in addition to seaborne benchmark, where we have an idea where that is going, is there a rule of thumb that we should think about as a discount to that quarterly benchmark system?

You know, Tony, offhand I don't know. I haven't done that analysis, so I don't want to guess at it. But directionally, it moves with the seaborne. I think you can assume that is going to happen but I don't think I have a good answer for you on how much correlation there is.

And then a quickie. Could you tell us what was the cost of your iron ore the flowed through the P&L at US Steel Europe in 3Q?

No, we don't disclose that.

Sean Wondrack, Deutsche Bank.

Thank you for taking my question. Just to go back one more time to the coking coal question, you talked about that you basically settled some contracts. Some are still up for negotiation. Can you talk about what inning we're in or what percentage has been established yet?

No, we think that's a competitive factor we need to keep to ourselves while we are negotiating. But what we said in the Q&A document is as far as we are going to go.

Okay, fair enough. Thank you. And then back just as a follow-up, I think you were asked the question before about your absolute level of debt. You guys have about $3 billion liquidity now and about $3.1 billion in debt. But if you look at the credit markets there, they are pretty tight right now. You have interest-rate increases coming. Your business appears to be stabilizing here to some degree. When do you think it might make sense to start peeling away these maturities or buying back some bonds as opposed to leaving the $3.1 billion outstanding? That's a way to reduce costs as well, right?

Actually, we have been doing some of that on a very careful manner, but we have been doing some of that already.

We have been making more purchases. We can continue to do that, so we don't disagree if we see good opportunity to deleverage some at the right price, we can do that.

Phil Gibbs, KeyBanc Capital Markets.

Thanks for taking my follow-up. I appreciate it. Mario, sorry to go back to this maintenance piece in the third quarter, but my question is relative to the second quarter. Were the unplanned outages a bigger hit to lost volume or was it a bigger hit to increased repair and maintenance costs? I'm just trying to gauge the level of impact.

It's manly volume, Phil.

Okay.

The volume from the incremental margin and production efficiencies would be bigger. Maintenance was up quarter over quarter but not as big an impact as the volume and the operating inefficiency.

Okay. So the volume, the operational efficiency was the bigger bucket than the repair and maintenance piece.

Yes, for sure.

As Mario pointed out, we didn't have any big catastrophic event. We had disruptions along the way that we had to address, and we are going to get after them in fourth quarter to make some better improvements to the facilities.

Okay, and then lastly the Bedrock transaction, there was $126 million in cash was already stipulated here and you had reserved for something lower, so you were receiving something a little bit higher than that. Is that call it reversal to your favor going to positively impact your income statement in the fourth quarter? And is that included in your guidance?

That would not be in those numbers because we have no idea when that is going to close. And remember, when we talk about adjusted EBITDA, a one-time item like that would not be considered in that adjusted EBITDA number. That is something that we would adjust out. Even though it's positive, we adjusted out the positives and the negatives that we think aren't reoccuring.

Thanks, so much guys. Appreciate it.

Thank you. No further questions in queue. Please go ahead, sir.

I really want to thank you before I sign off for sticking with us today. Hopefully, we provided you with some additional clarity on things that are important to what you do but I want to acknowledge and thank our employees. They have faced so many challenges over the past couple of years, and they have taken on these challenges and really deliver tremendous improvements to our business model. They have done so without compromising our core value of safety, which remains the foundation of the Carnegie Way.

We started this journey with leading safety performance and the Carnegie Way is now demonstrating that it can continue to improve that journey again. We still have challenges, we have more work to do, but we are recognizing that we are making progress. We have a dedicated and talented employee team, and we'll continue to be the driving force behind the Carnegie Way transformation. Thanks again for joining us today. Take care until the next one.

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